Online sales surge prompts San Diego to lobby for reform of tax allocations

With online sales surging at an accelerated rate, city of San Diego officials are lobbying the state to modernize how sales tax revenue from such transactions is doled out among cities.

They say the current system is antiquated and unfair and that they suspect San Diego is losing out on millions in sales tax revenue it could spend on libraries, firefighters, parks and other crucial services.

Sales tax accounts for 20 percent of the city’s revenue, or $270 million a year.

Many financial experts agree that a change is needed, but stress that it’s unclear which cities in California and San Diego County would gain or lose.

The source of the concerns is that the state treats sales tax from online purchases differently than sales tax from traditional retail transactions at brick-and-mortar stores.

In a traditional retail transaction, the city where the sale takes place gets 1 cent for every dollar of taxable sales.

But with online purchases, state officials send each of California’s 58 counties their share of sales tax revenue, and the counties then dole the money out to each city based on that city’s most recent share of traditional sales tax revenue.

Locally, the formula has been awarding San Diego 48 cents of every dollar of sales tax revenue collected in the county online.

With the size of the online pool rising in recent years as online sales surge, City Councilman Chris Cate said it’s time for a system that is more accurate, fair and equitable.

"As you see an increase in online sales, we're not getting that full dollar back in sales tax revenue," said Cate. "Let's figure out once and for all where these sales are occurring and track it. The problem is we don't know our fair share."

Cate sent Gov. Jerry Brown a letter last week urging him to have the state Board of Equalization conduct a pilot study in San Diego to track all online sales to the address of the buyer so sales tax can be doled out appropriately.

Cate also asked the governor to consider eliminating the “county pool” system.

“I believe this proposal will ensure revenues are distributed fairly, and will be more reflective of the economic activity of local jurisdictions,” Cate wrote in the letter.

Michael Coleman, a policy advisor for the League of California Cities and California Society of Municipal Finance Officers, said Cate has the right idea.

"It's something I've been arguing for because I like to see government work better because it's more fair and distributes revenue more evenly,” said Coleman. "We have computer systems now that can do this in two seconds. But the system was set up this way because it was too complicated for retailers to code this revenue so they just dumped it in these pools."

But Coleman said such a change could get stymied by politics, because some cities would lose millions in revenue.

"There would be some cities in San Diego County that would get less revenue and some would get more," he said. "It's a zero-sum game."

A bill on a similar topic introduced last year in the Assembly died shortly after the Board of Equalization released a report analyzing which cities would gain and lose.

The bill would have eliminated similar county pools for private sales of automobiles, but the concept is the same, Coleman said.

Coleman said bedroom communities with fewer retail and industrial zones would likely gain from eliminating county pools for online sales, because their share of online sales is probably higher than their share of traditional sales at brick-and-mortar stores — the number used to calculate pool allocations.

Cities with auto malls and large shopping malls, such as Carlsbad, National City and Escondido, would be the likely losers, Coleman said.

"The cities that are making out on the existing set up are the cities with a high concentration of brick and mortar retail sales," he said. "Where these brick-and-mortar sales are happening right now is possibly not where these online sales are happening."

Rural areas would also likely gain at the expense of urban areas, he said, because residents who lack convenient access to shopping typically buy more online.

But Coleman stressed that it’s hard to know exactly which cities would gain and lose, or by how much.

Other factors could include the age of a city’s residents, which may affect how comfortable they are with online shopping, and income level, which could affect how many residents in a city have access to the Internet.

A spokeswoman for the Board of Equalization, which could eliminate county pools without state legislation mandating such a move, said a change is unlikely based on administrative hurdles and an ongoing update of the board’s technology.

Cate said he’s not convinced it would be hard to make the change. He said the administrative hurdles would be “minimal at best” in his letter to the governor.

"There are ways to do this," Cate told the Union-Tribune. "We are not asking for the world here."

He said a change is especially crucial with studies showing online sales made up more than 20 percent of transactions during the holiday season, up from 15 percent the year before.

Councilman Chris Ward said he also supports the change, even though he has no idea whether San Diego would gain or lose.

"This is part of the reason our financial management team has struggled to forecast future sales tax growth," said Ward. "Until we change how we are tracking, we can't really be sure what is due to the city of San Diego and that's the problem. I hope Sacramento will make a renewed effort to look at this."